Almost a third of all corporate taxes paid in Kenya in the past two years came from the banking sector, a new report shows.
It did so amid the adverse effects of the Covid-19 pandemic, which resulted in a total of 12 percent decline in the industry’s overall tax contribution in 2020 compared to 2019, according to the report prepared by auditing firm PricewaterhouseCoopers (PwC) on behalf of Kenya Bankers (KBA).
The report attributes the decline to reductions in income taxes – corporate tax and pay-as-you-earn (paye).
“This decline is partly due to reduced tax rates, particularly the lowering of the corporate tax rate from 30 percent to 25 percent, the lowering of the top paye rate from 30 percent to 25 percent and the lowering of the VAT rate from 16 percent to 14 percent”, it says in the report.
“The aim of these measures was to relieve taxpayers from the negative economic effects of the Covid-19 pandemic.”
The reduced profitability led to a decrease in corporate tax paid on profits. Paye’s decline was also due to a roughly 8.3 percent decrease in the workforce.
Corporate income tax and Paye made the largest contributions to the sector’s total tax contribution at 42.5 percent and 16.5 percent, respectively.
During the publication of the report on Thursday, KBA boss Habil Olaka said the contribution shows that the industry has remained resilient, has overcome the challenges caused by the Covid-19 pandemic and has continued to support the economy.
“We recognize the important role the financial services sector plays in supporting economic growth,” he said.
“In this regard, we remain determined to continue efforts to anchor the business recovery in the face of the Covid-19 disruption.”
Bank profitability declined over the last year, mainly due to an increase in bad loans, for which lenders were forced to put some money aside to hedge against possible defaults.
Alice Muriithi, associate director of PwC Kenya and senior technical advisor on the study, said the report raises a number of questions about how tax policies affect the banking sector and their contribution to the tax base and economy.
Due to the pandemic, banks experienced depressed performance and asset quality, with loan loss provisions increasing 47.5 percent from Sh134.3 billion in 2019 to Sh198.1 billion.
According to the State of the Banking Industry Report, 2020, 45.7 percent of non-performing loans were absorbed by credit default compensation, compared with 40.2 percent in 2019.
The industry also restructured customer loans worth 21.63 trillion. Sh. or 54.2 percent of the total 3 trillion loan portfolio. Sh., With the share of gross non-performing loans in gross loans increasing significantly from 12 percent to 14.1 percent in December 2019.
Despite the challenges, access to credit has improved for micro, small and medium-sized enterprises (MSMEs).
According to the Central Bank of Kenya 2020 MSME Survey report, corporate lending increased 42 percent between 2017 and 2020 to $ 638.3 billion.
The report also finds that the banks that participated in the study contributed 7.5 percent of total state tax revenue in 2019 and 2020.
“With a total nationwide population of six million registered taxpayers, this is indeed a very significant contribution,” said Ms. Muriithi.